SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Commission File Number 1-12744
MARTIN MARIETTA MATERIALS, INC.(Exact name of registrant as specified in its charter)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
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TABLE OF CONTENTS
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
For the Quarter Ended March 31, 2002
INDEX
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESCONSOLIDATED STATEMENTS OF EARNINGS
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MARTINS MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESFORM 10-QFor the Quarter Ended March 31, 2002
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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The following presents the estimated amortization expense for intangible assets for each of the next five years and thereafter. The expense for 2002 includes $1,454,000 recognized in the quarter ended March 31, 2002.
Intangible assets not subject to amortization are trade names and water rights that have an aggregate carrying value of $5,709,000 at March 31, 2002.
In accordance with FAS 142, effective January 1, 2002, the Corporation discontinued the amortization of goodwill. The following pro forma information presents the results of operations for the quarter ended March 31, 2001 as if FAS 142 had been adopted on January 1, 2001 (dollars in thousands):
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Effective January 1, 2002, the Corporation adopted Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). FAS 144 supercedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of and Accounting Principles Board Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. FAS 144 establishes criteria for the recognition and measurement of an impairment loss for long-lived assets to be held and used and defines classification of continuing and discontinued operations. FAS 144 also requires that assets held for sale be measured at the lower of their carrying amount or fair value less cost to sell. The adoption of FAS 144 did not have a material effect on the Corporation’s earnings or financial position.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“FAS 143”). FAS 143 requires recognition of the fair value of a liability representing an asset retirement obligation in the period in which it is incurred. The asset retirement obligation is recorded at the acquisition date of a long-lived tangible asset if a reasonable estimate of fair value can be made. A corresponding amount is capitalized as part of the asset’s carrying amount. The Corporation incurs some reclamation liabilities as part of its aggregates mining process. However, certain reclamation costs are currently treated as normal ongoing operating expenses and expensed generally in the period in which they are incurred. FAS 143 is effective the first quarter of 2003 for the Corporation. The effect of the adoption of FAS 143 on the earnings and financial position of the Corporation has not yet been determined but is not expected to be material.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OVERVIEW Martin Marietta Materials, Inc. (the “Corporation”), operates in two principal business segments: aggregates products and magnesia-based products. The Corporation’s sales and earnings are predominately derived from its aggregates segment, which processes and sells granite, limestone, and other aggregates products from a network of 343 quarries and distribution facilities in 28 states in the southeastern, southwestern, midwestern and central regions of the United States and in the Bahamas and Canada. The division’s products are used primarily by commercial customers principally in domestic construction of highways and other infrastructure projects and for commercial and residential buildings. The magnesia-based products segment produces magnesia-based chemicals products used in industrial, agricultural and environmental applications, and dolomitic lime sold primarily to customers in the steel industry.
CRITICAL ACCOUNTING POLICIES The Corporation outlined its critical accounting policies in its Annual Report of Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 27, 2002. Effective January 1, 2002, the evaluation of impairment for goodwill and indefinite-lived intangible assets is in accordance with the criteria proscribed in Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets (“FAS 142”). As discussed in Note 6 to the consolidated financial statements on pages 8 through 10, the Corporation is in the process of completing the initial evaluation in accordance with the guidance of FAS 142.
RESULTS OF OPERATIONS Consolidated net sales for the quarter increased 10% to $289.9 million from 2001 first quarter sales of $263.7 million. Consolidated loss from operations for the quarter was $5.0 million as compared to earnings from operations of $2.2 million in the first quarter 2001. Interest expense increased 6% to $11.1 million for the first quarter 2002, primarily due to financing related to the Meridian Aggregates Company acquisition. Consolidated net loss for the quarter was $10.5 million, or $0.22 per diluted share, compared with first quarter 2001 net loss of $4.7 million, or $0.10 per diluted share.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS(Continued)
First Quarter Ended March 31, 2002 and 2001
Net sales for the Aggregates division increased 17% for the first quarter 2002 to $271.2 million, from 2001 first quarter net sales of $232.7 million. The increase in net sales is a result of a 16% increase in aggregates shipments, all due to the acquisitions of Meridian and twelve other companies completed in 2001. Heritage aggregates shipments declined 2%, with an overall volume increase in the Texas market being offset by weakening construction demand in the south central and midwest regions of the United States. Additionally, the North Carolina market was negatively affected by weak commercial demand and poor weather in the last half of March, which delayed the start of the highway construction season. Overall, Aggregates division pricing increased 1%, contributing to the increase in net sales. Heritage aggregates average selling price increased over 3%, including the effect of product mix.
Gross profit as a percentage of net sales for the Aggregates division was 7.7% as compared to 9.9% in the prior year first quarter. Among other things, the decline was caused by higher-than-anticipated start-up costs at the Bahamas crushed stone facility, winter losses incurred at certain locations acquired in 2001 and high levels of repair and maintenance expense at newly acquired operations. Historically, the first winter repair and maintenance cycle at acquired locations contains higher-than-normal costs as the equipment is upgraded to meet the division’s operational standards. These factors were partially mitigated by the strong operational performance experienced at the Southwest Division, lower fuel costs and the nonamortization of goodwill under the provisions of FAS 142.
Selling, general and administrative expenses as a percentage of net sales for the Aggregates division increased due to higher pension expense and higher costs related to the newly implemented enterprise-wide information systems. The Aggregates division’s loss from operations was $6.4 million in the first quarter of 2002 as compared to earnings from operations of $2.4 million in the first quarter of 2001.
The following tables present volume and pricing data and shipments data for heritage operations and acquisitions:
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The Aggregates division’s business is significantly affected by seasonal changes and other weather-related conditions. Consequently, the Aggregates division’s production and shipment levels coincide with general construction activity levels, most of which occur in the division’s markets typically during the spring, summer, and fall seasons. Further because of the potentially significant impact of weather on the Corporation’s operations, first quarter results are not indicative of expected performance for the year.
Based on current economic conditions and forecasts, management continues to expect 0% to 3% volume growth in heritage aggregates shipments and total growth of 3% to 6%, inclusive of acquisitions. Pricing is expected to increase 2% to 3%. The Corporation’s net earnings for the year are expected to range from $2.40 to $2.70 per diluted share based on expected operational improvement from efficiency projects, other income at or above prior-year levels, lower-than-anticipated interest costs, and modest improvement in the economy in the second half of the year. It is also inclusive of $0.23 per diluted share effect from the elimination of the recognition of goodwill amortization charges and adjustments to the 2002 estimated tax rate. This estimate is exclusive of any impairment charge that may be recorded in accordance with FAS 142.
The Corporation outlined the risks associated with its aggregates operations in its Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 27, 2002. Management continues to evaluate its exposure to all operating risks on an ongoing basis. However, due to current general economic conditions, adverse exposure to certain operating risks is heightened, including the ability of state and local governments to fund construction and maintenance. Also, current levels of commercial and residential construction activity may be more negatively affected, if the general economic downturn continues or deteriorates.
Magnesia Specialties’ first quarter sales of $18.7 million declined 39% due, as expected, to the May 2001 sale of certain assets of the refractories business, when compared to the year-earlier period. Earnings from operations for the first quarter were $1.5 million for 2002 as compared to a loss from operations of $0.2 million in 2001, primarily as a result of lower fuel costs.
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The following tables present net sales, gross profit, selling, general and administrative expenses, and earnings from operations data for the Corporation and each of its divisions for the three months ended March 31, 2002 and 2001. In each case, the data is stated as a percentage of net sales, of the Corporation or the relevant division, as the case may be.
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The seasonal nature of the construction aggregates business impacts quarterly net cash provided by operating activities when compared with the year. Full year 2001 net cash provided by operating activities was $252.9 million, compared with $3.4 million used for operations in the first quarter of 2001.
First quarter capital expenditures, exclusive of acquisitions, were $28.1 million in 2002 and $51.2 million in 2001. Capital expenditures are expected to be approximately $125 million for 2002, exclusive of acquisitions. Comparable full-year capital expenditures were $194.4 million in 2001.
The Corporation continues to rely upon internally generated funds and access to capital markets, including its two revolving credit agreements and a cash management facility, to meet its liquidity requirements, finance its operations, and fund its capital requirements.
With respect to the Corporation’s ability to access the public market, currently, management has the authority to file a universal shelf registration statement with the Commission for up to $500 million in issuance of either debt or equity securities. It should be noted, however, that the Corporation has not determined the timing when, or the amount for which, it may file such shelf registration. The Corporation’s ability to borrow or issue debt securities is dependent, among other things, upon prevailing economic, financial and market conditions.
In May 2002, the Corporation entered into interest rate swap agreements related to $100 million of the Notes due in 2008. The Corporation will receive a fixed interest rate and pay a variable rate based on LIBOR. The swap agreements terminate concurrently with the maturity of the Notes. The swap agreements are designed to effectively convert the interest rate expense on $100 million of the Notes from a 5.875% fixed annual rate to an average floating annual rate equal to 6-month LIBOR plus 0.235%.
Based on prior performance and current expectations, the Corporation’s management believes that cash flows from internally generated funds and its access to capital markets are expected to continue to be sufficient to provide the capital resources necessary to fund the operating needs of its existing businesses, cover debt service requirements, and allow for payment of dividends in 2002.
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The Corporation may be required to obtain additional levels of financing in order to fund certain strategic acquisitions, if any such opportunities arise. Currently, the Corporation’s senior unsecured debt is rated “A-” by Standard & Poor’s and “A3” by Moody’s. The Corporation’s commercial paper obligations are rated “A-2” by Standard & Poor’s, “P-2” by Moody’s and “F-2” by FitchRatings. In July 2001, Standard & Poor’s revised its outlook on the Corporation to negative from stable while reaffirming its ratings. The outlook revision reflects Standard & Poor’s belief that the Corporation’s acquisition activity could make it more difficult for the Corporation to restore its debt-to-capitalization to certain levels. While management believes its credit ratings will remain at an investment-grade level, no assurance can be given that these ratings will remain at the above-mentioned levels.
ACCOUNTING CHANGES The accounting changes that currently impact the Corporation are included in Notes 6 and 7 to the Consolidated Financial Statements.
OTHER MATTERS Investors are cautioned that all statements in this Quarterly Report on Form 10-Q that relate to the future involve risks and uncertainties, and are based on assumptions that the Corporation believes in good faith are reasonable but which may be materially different from actual results. Factors that the Corporation currently believes could cause actual results to differ materially from the forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, national and regional economic conditions in the markets the Company serves; the timing or extent of any recovery of the economy; the level and timing of federal and state transportation funding; levels of construction spending in the markets the Company serves; unfavorable weather conditions; fuel costs; transportation costs; competition from new or existing competitors; ability to recognize quantifiable savings from internal expansion programs; ability to successfully integrate acquisitions quickly and in a cost effective manner; changes in capital availability or costs; and the timing and occurrence of events that may be subject to circumstances beyond the Company’s control. Investors are also cautioned that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. These forward-looking statements are made as of the date hereof based on management’s current expectations, and the Corporation does not undertake an obligation to update such statements, whether as a result of new information, future events, or otherwise.
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INVESTOR ACCESS TO COMPANY FILINGS Shareholders may obtain, without charge, a copy of Martin Marietta Materials’ Annual Report on Form 10-K, as filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2001, by writing to:
Martin Marietta Materials, Inc. Attn: Corporate Secretary 2710 Wycliff Road Raleigh, North Carolina 27607-3033
Additionally, Martin Marietta Materials’ Annual Report, press releases and filings with the Securities and Exchange Commission, including Forms 10-K, 10-Q, 8-K and 11-K, can generally be accessed via the Corporation’s Web site. Filings with the Securities and Exchange Commission accessed via the Web site are available through a link with the Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system. Accordingly, access to such filings is available upon EDGAR placing the related document in its database. Investor relations contact information is as follows:
Telephone: (919) 783-4658 Email: investors@martinmarietta.com Web site address: www.martinmarietta.com
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation is exposed to fluctuations in interest rates on borrowings under its various long-term debt instruments. Because substantially all of the debt was at fixed rates, a decline in interest rates would result in an increase in the fair market value of the liability. In May 2002, the Corporation entered into interest rate swap agreements (the “Swaps”) for interest related to $100 million of the $200 million Notes due in 2008 to increase the percentage of its long-term debt that bears interest at a variable rate. The Swaps are fair value hedges designed to hedge against changes in the fair value of the Notes due to changes in LIBOR, the designated benchmark interest rate. The terms of the Swaps include the Corporation receiving a fixed annual interest rate of 5.875% and paying a variable interest rate based on 6-month LIBOR plus an average of 0.235%.
The Corporation is required to record the fair value of the Swaps and the change in the fair value of the related Notes, due to changes in LIBOR, in its consolidated balance sheet. The Corporation will record the fair values based on determination of the fair values of the Swaps. In accordance with Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities, no gain or loss is recorded for the changes in fair values. As a result of the Swaps, the Corporation has increased interest rate risk associated with changes in the LIBOR rate.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Part I. Item 3. Legal Proceedings of the Martin Marietta Materials, Inc. Annual Report on Form 10-K for the year ended December 31, 2001.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the first quarter of 2002.
Item 5. Other Information.
On April 16, 2002, the Corporation announced revised first quarter earnings expectations. The Corporation also reaffirmed its full-year 2002 earnings guidance.
On April 23, 2002, the Corporation announced it had entered into a licensing agreement with Composittrailer n.v., to manufacture and market commercial truck trailers in North America using composite technology.
On April 25, 2002, the Corporation reported financial results for the first-quarter ended March 31, 2002.
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PART II — OTHER INFORMATION(Continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESFORM 10-QFor the quarter ended March 31, 2002
EXHIBIT INDEX
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